Deciphering Syndication Investment TerminologySo, you are at the point where you finally received your first Executive Summary (also known as Offering Memorandum) from a syndicator. As you glance through the summary, you will immediately notice that it contains quite a bit of terminology that you either forgot from your college days or may never even heard of before. My post will provide the lay of the land including examples, so that you can walk away with a general understanding of the common terms used in an investment offering. Show
1. NOI (Net Operating Income) is the difference between Gross Revenue and Operating Expenses. NOI excludes Income Taxes and Debt. 2. Capitalization Rate (commonly referred to as “Cap Rate”) indicates the potential return on investment. 3. Cash on Cash (CoC) Return measures the relationship between cash invested and the actual cash flow, or NOI. CoC Return measures the annual return on investment, and is determined by proportion of the annual dollar income return and the total amount invested. 4. Equity Multiple is defined as the total cash distributions received from an investment, divided by the total equity invested. 5. Average Annual Return is the mathematical average amount of money earned by an investment each year over a given period. It is calculated as a geometric average to show what an investor would earn over a set time period if the annual return was compounded. Avg Annual Return = Total Returns Earned
/ Years of Investment 6. IRR (Internal Rate of Return) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. IRR is used to evaluate the attractiveness of a prospective project or investment. In other words, IRR is a discount rate that makes the Net Present Value (NPV) of all cash flows from a particular project equal to zero. IRR and NPV calculations rely on the same
formula. 7. Preferred Return (aka Pref) is a term used in the world of private equity. Pref refers to the threshold return that limited partners must receive prior to general partners receive their return. 8. Waterfall is a method of splitting profits among
partners in a transaction that allows for profits to follow an uneven distribution. The waterfall structure can be thought of as a series of thresholds that once achieved, spill over all excess cash into the next threshold. 9. Reversion Cap Rate is the Cap Rate that is used to derive reversion value. A benefit that an investor expects to receive as a lump sum at the end of an investment. 10. Property Management Fee is the fee paid to the company that is responsible for managing the property and for day-to-day operations. 11. Asset Management Fee is the fee paid to Sponsor/General Partner responsible for managing the asset overall and for ensuring that the investment is performing as planned. This fee is typically stated below the NOI. 12. Split indicates what percentage of distributions allocated to LPs versus GPs. 13. DSCR (Debt Service Coverage Ratio) is a measure of the cash available to pay current debt (principal plus interest payments). The ratio states net operating income as a multiple of debt obligations due within one year. Banks typically require to have DSCR of at least 1.25. While this list is in no way all inclusive it will give you a good starting point. For more details please refer to my FAQ’s. Interested in exploring passive investing via syndicationsJoin The SAMO ClubHow do you calculate cap rate with Noi?The cap rate formula divides the net operating income (NOI) that a property generates before debt service (P&I) by the property value or asking price: Cap Rate = NOI / Property Value.
What does 7.5% cap rate mean?What does a 7.5 cap rate mean? A 7.5 cap rate means that you can expect a 7.5% annual gross income on the value of your property or investment. If your property's value is $150,000, a 7.5 cap rate will mean a yearly return of $11,250.
How do you calculate cap rate on property?The formula for a cap rate is simple: cap rate is the annual NOI divided by the market value of the property. For example, a property worth $10 million generating $500,000 of NOI would have a cap rate of 5%.
What is the formula used when using the income capitalization approach?IRV – notation for the basic capitalization formula used in the income approach where: Income divided by Rate equals Value. V = I ÷R • Know this income approach formula!
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